IssuesPA

January 1 2004

More than $700 million in new revenues will fund the 2003-2004 budget. But who's going to foot the bill? IssuesPA takes a closer look.

(January 2004) Pennsylvania's 2003-2004 state budget supplement approved in December featured a revenue package projected to raise $722.9 million in 2003-2004 - and double that - nearly $1.5 billion - in 2004-2005. Several new or increased taxes primarily impact individuals.

The budget included two new 5% gross receipts taxes - one on cell phone bills, another on interstate land lines. The package also included two state tax increases - a personal income tax increase, from 2.8% to 3.07%, and a hike in the state cigarette tax from $1.00 to $1.35 per pack. (For an overview of the entire budget package approved in December, click here)

What's the impact of the new tax increases? The personal income tax is expected to raise the most revenue - nearly half of the overall revenue package. IssuesPA examined the two new taxes and the two tax increases across income and households to determine the impact of the new tax policies on Pennsylvanians.

So who really pays?

Using sales, personal income, excise and gross receipts taxes and based on average consumption by income level - including average consumption of cigarettes and use of cell phones -- middle and upper income working households will experience the greatest increase in state tax burden. As the chart below illustrates, a household earning $40,000 per year can expect to pay almost 6% of household income in state taxes in 2004 - compared to 5.6% in 2003. A household earning $100,000 per year will pay an estimated 5.18% in 2004 - compared to 4.86% in 2003.

Household Composition

Annual Income


2003 State Taxes
 

2004 State Taxes

Average Change

$$$

%  of Income

$$$

%  of Income

$$$

Percentage Change

Working Married Couple with
2 Children

$15,000

412

2.75%

433

2.89%

+21

5.10%

$40,000

2,241

5.60%

2,393

5.98%

+152

6.78%

$100,000

4,857

4.86%

5,177

5.18%

+320

6.59%

Working Single Adult,  No Children

$15,000

763

5.09%

818

5.45%

+55

7.21%

$40,000

2,241

5.60%

2,393

5.98%

+152

6.78%

$100,000

4,857

4.86%

5,177

5.18%

+320

6.59%

Retired Married Couple

$15,000

412

2.75%

433

2.89%

+21

5.10%

$40,000

1,151

2.88%

1,198

3.00%

+47

4.08%

$100,000

2,088

2.09%

2,141

2.14%

+53

2.54%

 

 

 

 

 

 

 

 

 


Source: Pennsylvania Economy League calculations

Who doesn't pay - relatively speaking?

The impact of the tax changes on low-income families varies, depending on household composition. A personal income tax forgiveness credit impacts low-income working households. And the tax-back credit for one dependent increased from $9,000 to $9,500, beginning this year.

A married couple earning $15,000 a year with two children would experience an overall state tax increase of about $21 per year - assuming they use a cell phone, make long distance calls, and smoke an average amount based on income level. To the extent they don't use a cell phone, smoke or make long distance calls, the tax increase would decline, and vice-versa.

The family wouldn't owe state income tax after the tax forgiveness credits are applied. The overall impact of the tax increases on low-income families is small. In 2003, the percentage of income paid as state taxes was roughly 2.75%. In 2004, that likely will increase to an estimated 2.89% of income.

However, a single adult earning $15,000 yearly would owe personal income tax. Again assuming that cigarette smoking and long distance and cell phone use is about average, that's about $55 more per year overall in state taxes. As a percentage of income paid as state taxes, that means a change from 5.09% in 2003 to 5.45% in 2004.

The state tax code establishes that retired Pennsylvanians don't pay state income taxes on income from pensions, IRAs, or other exempt retirement sources. Other income - such as dividends or stock payouts - is considered taxable income; but if that qualified income falls below the $6,500 taxback/tax forgiveness credit ($13,000 for couples), then retirees won't pay state income tax.

In 2003, retirees on average paid less than 3% of their annual income in state taxes. Under the tax changes for 2004, that will increase only slightly. Assuming they smoke cigarettes, use a cell phone and make long-distance calls an average amount based on income level, retirees may pay an estimated $21 to $53 more annually in state taxes, still about 3% or less of annual income.

So what does all this mean?

This analysis considers only the impact on state taxes paid. Other taxes - such as the property tax - also are important in determining the overall impact of tax policies on individuals and households. The most recent legislative action doesn't impact those issues, although the door hasn't closed - yet.

The bottom line? If you're low income and/or retired, don't make many long-distance calls, don't use a cell phone, and don't smoke cigarettes, this is the tax package for you. The bulk of the added taxes will fall on others, depending on their income and lifestyle.